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Are Passive ETFs Passé?

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Are Passive ETFs Passe?

While passive exchange-traded funds (“ETFs”) represent a significant majority of the capital flowing into the US$3.4 trillion global ETF industry, actively managed and strategic beta (rules-based) ETFs could be poised to quickly gain ground on their passive peers.

Actively managed and strategic beta ETFs are among the most popular types of strategies being launched by ETF providers. However, this news isn’t all bad for passive ETFs.

A rising tide is lifting all boats

The 2018 calendar year was rough on many investors, and the volatility that defined the period negatively impacted the ETF market. In fact, global inflows decreased by approximately 20% year-over-year from 2017.

Still, 2018’s US$516.1 billion in investor inflows was a significant amount, and this was the second-best year on record for inflows into the industry.1 So, even if passive ETFs’ market share actually declined, in absolute terms, interest in passive ETFs appeared to still be healthy.

The relationship between the different ETF strategies is … complicated

The shift into active and strategic beta ETFs is hardly the first time the relatively young ETF industry has undergone significant change.

Current trading volumes reflect an ETF market dominated by large professional investors, quantitative strategies and institutional investors. This is a far cry from the industry’s early days, when it was dominated by smaller, individual investors.2

In concert with the continued growth of the industry, and of active and strategic beta ETFs in particular, this shift could suggest increased investor sophistication and a greater investor comfort in using ETFs as part of more nuanced portfolio strategies.

Such strategies often involve combining active and passive investments to work in concert – for example, the “core-and-explore” investment strategy often begins with passive investments as the “core” by default.

This could help establish passive ETFs as important strategic components of a given portfolio, in addition to the benefits of their relatively low costs.

Changes in the ETF market occur quickly and often, which makes finding the correct positioning for your investment solutions essential. Contact us today at 1.844.243.1830 or info@ext-marketing.com to learn how we can help you better market your solutions in this ever-changing investment landscape.

Sources:
1 Chris Flood, “ETF growth sputters after markets’ ‘rocky ride’ in 2018,” Financial Times, January 11, 2019.
2 Ted Seides, “The Death of Passive Management?” Institutional Investor, September 9, 2018.
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